The Israeli tax authorities are examining the possibility of changing the law with regard to tax collection in the event of an appeal by a taxpayer to the district court in relation to tax controversy, including disputes concerning transfer pricing issues.
Under the current legal structure, a tax payment in the case of a tax appeal will only be charged subject to and after a district court decision or a settlement agreement between the taxpayer and the tax authority. However, the Israeli tax authorities are considering applying the “Italian model”, ”according to which a taxpayer must pay (at least) a partial tax up front in the event of a dispute appealed to the district court (i.e. after issuing orders by the ITA in stage B of the hearing). It has yet to be determined whether the proposed legislative change will require the taxpayer to pay all or part of the disputed tax with the possibility of a deferment request for the remaining portion.
This potential change is even more specifically poignant regarding transfer pricing disputes as they are bilateral in nature since they concern both the Israeli taxpayer as well as a taxpayer in another jurisdiction. In the event that the tax authority in the non-Israeli jurisdiction determines that a settlement arrangement that was “forced” on the taxpayer (e.g. due to economic hardship) does not match market conditions with respect to the transaction under consideration, the other tax authority will challenge the taxpayer’s ’settlement. This may lead to denial of corresponding adjustments and undue double taxation.
In our opinion, the Israeli tax authorities’ ’position stems from recent budget and collection difficulties, likely in light of the Covid-19 crisis, and considering the fact that legal proceedings often take several years.
It should be emphasized that this issue is still being examined by the Israeli tax authorities and a final decision has not yet been passed by the Knesset (Israeli parliament). Nevertheless, the proposal in question has already drawn much criticism at this early stage due to the heavy and unreasonable economic pressure that such may effectively force taxpayers to unwillingly accept a settlement arrangement rather than appealing to district courts even if they are confident of their position from a legal and economic perspective.
There are those who believe, and the authors of this article among them, that the proposed provision is unbalanced and contradicts the Basic Laws of the State of Israel, including a fatal violation of Article 8 of the Basic Law of Human Dignity and Liberty, including the right to property, except in a law appropriate to the values of the State of Israel, intended for a proper purpose, and to an extent that does not exceed what is required.
[1] An edited version of this article was published on https://mnetax.com/israeli-considers-requiring-taxpayers-to-pay-disputed-tax-or-transfer-pricing-assessments-pending-appeal-39652 in August 2020